The Right needs to start selling capitalism to the masses before it's too late

There is really just one question in political economy: do we want a bigger
state, with a more activist government, or do we want a smaller one, with
market forces allowed greater sway? Everything else is mere detail.

There are lots of government programmes that are unpopular but that have escaped far too lightly from the austerity to datePhoto: AFP

It is no wonder, therefore, that political battles often feel as if they are stuck in a time loop, with the same ideologically-charged rows over the economy repeating themselves over and over again, at 10 or 20-year intervals.

This time, the left-wing camps on opposite sides of the Atlantic are being led by Barack Obama and Ed Miliband, both unafraid to call for a much greater degree of government intervention; the smaller-state camp is led by conservatives such as George Osborne and Republicans in the US.

On the face of it, the latter are in the ascendancy again. Public spending has been falling and, as the economy recovers, Keynesian arguments for fiscal stimulus have lost whatever traction they might once have had. But it would be absurd for conservatives to rejoice.

They haven’t really taken the public along with them and their most recent tactical decisions have been astonishingly wrong-headed. The situation is much grimmer than they realise; their reliance on ludicrously abstract arguments and their failure to win the struggle for hearts and minds could allow the statists to snatch victory from the jaws of defeat.

The Republican Party’s role in the partial shutdown of the US government is a particularly disastrous miscalculation. Together with the battle over the debt ceiling in two weeks’ time, which could yet force a catastrophic default on US government debt, this will damage the House Republicans who back it more than it will Obama and his Democratic allies, who of course are also to blame. Americans are far more individualistic than the British, but few want random parts of their government to close, civil servants to be put on unpaid leave and Washington’s embarrassing dysfunctionality to be exposed for the world to see.

Opinion polls show that while both parties are blamed for the chaos, the pro-cuts Republicans come out worse. Whether this is fair or not is irrelevant: supporters of a smaller state will end up with egg on their faces.

In the short-term, the impact on output will only be relatively modest, with Goldman Sachs warning that a two-day shutdown could reduce annualised fourth quarter GDP by 0.1 percentage points, and that a week-long shutdown would cost 0.3 points. But the reputational hit to the US and the uncertainty it creates for business will be much greater, if harder to quantify. The increasing threat of debilitating political stalemate was one reason why Standard & Poor’s cut Uncle Sam’s credit rating from AAA to just AA+ in August 2011 during a previous round of debt ceiling shenanigans. Instead of sounding like principled believers in lower taxes, House Republicans will soon start to be perceived as incompetent and irresponsible wreckers and extremists.

Needless to say, Osborne, who is far less radical that the Republicans, believes that his own, ultra-gradualist strategy to reduce public spending as a share of national income is far more palatable. Sadly, he is wrong.

His big idea is that austerity will now last another six years at least, helping to ensure a budget surplus by the end of this decade.

While the end goal is a good one, dragging out belt-tightening for so long for the sake of what will sound like abstract bean-counting is senseless. It is hardly the sort of policy that will capture the imagination of a jaded, tired and impoverished public that wants to understand how the Tories will make them better off; voters need to be shown that a much more concrete link exists between reduced spending and their own pocketbooks and quality of life.

Whatever support there is for austerity tends to be based on necessity and short-term housekeeping rather than any deep-seated philosophical shift. Voters understand that public sector restraint is needed, and that deficits must be reduced, and there is little tolerance for government waste or for those perceived to be sponging off taxpayers; but centrist and floating voters remain keen on state-provided public services and benefits.

Regulatory interventions also remain popular and big business viewed with suspicion. There is widespread support for many of Miliband’s most preposterous, economically illiterate attempts at rigging markets. Even many centre-right voters are hooked on handouts, both here and in the US, with free bus passes for relatively prosperous pensioners the obvious anomaly; libertarian ideas are on the rise, especially among younger people, but they remain the preserve of a small minority.

Basing the case for lower spending merely on an appeal to fiscal responsibility alone therefore won’t wash. In both Britain and America, supporters of a smaller state need to refocus their arguments to make them more relevant. They need to show that they believe in capitalism and markets because they think that these are the best ways of helping the poor and the middle class.

Big government usually implies weaker individuals and families; choice, markets and tax cuts can be harnessed to empower the little guy with pro-consumer reforms in banking, energy, construction and transport. It is vital to explain how policies to reduce taxes and red tape on business will mean more investment, increased productivity and higher wages, directly tackling the cost of living crisis. There needs to be even more spending cuts; crucially, however, the proceeds of these need to be shared between across the board, easy to understand tax cuts and deficit reduction.

Ironically, there are lots of government programmes that are unpopular but that have escaped far too lightly from the austerity to date. Take subsidies to business: they are widely despised and abolishing them would appeal to both Left (who see the handouts as redistribution from poor to rich) and the Right (who want real capitalism) and the money used to cut taxes and reduce the deficit. Green subsidies have also been captured by rent-seeking corporations. Foreign aid is another easy target. Needless to say, cuts will need to range much further and also target far more sensitive programmes. But it makes sense to start with low-hanging fruit.

While the Republicans are now engaged, yet again, in a fight to the end with Obama that they are unlikely to win, the Tories have a narrow window of opportunity to regain the initiative. Over the coming weeks, the party needs to come up with a set of bankable, easy-to-understand, cost of living policies compatible with the principles of a market economy. They need to show how capitalism can be made to work for the consumer and taxpayer, and why socialism will only lead to higher prices, less choice, fewer jobs and increased taxes. If they can pull that off, they may still win the next election; if not, we might as well begin to prepare for the next Labour government.